Chief Technology Officer and cofounder at Plex Systems, focused on next-generation cloud solutions for the manufacturing enterprise.
One obstacle made clear for manufacturers in 2022 is the challenge of successfully navigating supply chain volatility and manufacturing production planning. Volatility and demand shocks caused manufacturers to strategize and re-strategize based on the latest updates, which dramatically changed at a moment’s notice. In part, the constant change and volatility drove manufacturing to seek technology solutions to address these issues, which contributed to a 50% increase in smart manufacturing technology adoption from 2021 to 2022.
Many manufacturers are pursuing smart manufacturing technology to address operational issues. But what about automating financial productivity and legal compliance? How can manufacturers ensure they’re capturing revenue opportunities that might be forgotten or missed? Taking a smart manufacturing approach includes considering all aspects of running an enterprise. Smart contracts, enabled by an industry-driven blockchain, can automate the execution of transactions and partner interactions to capture missed revenue and ensure contractual compliance, which is critical in today’s competitive market when maintaining business relationships and optimizing profit is key to success.
Paper Contract Problems And Limitations
Companies currently manage paper contracts in a variety of ways, including folder systems, PDFs or tracking documents in an ERP system. Each paper-based contract management strategy introduces opportunities for error and miscommunication.
The problem with these approaches to contract management is that they’re “dumb.” Not in that the approach itself lacks intelligence, but the contract management process hasn’t evolved to modern times, is still largely manual and paper-based and doesn’t align with a “smart manufacturing” approach. There are several issues with this approach to contract management and tracking.
First, no universal source of truth between contracted parties can be established. When the contract is initially agreed upon, both parties have a copy of the same document as the source of truth. However, contracts are inevitably altered over time as the agreement between parties develops and business relationships change. Blockchain technology ensures that, as contracts are altered, each party has a copy of the contract that is updated in real time. If two parties don’t have a way of ensuring they are continuously operating on the same contractual obligations by leveraging a shared and immutable contract document, they risk operating under outdated contractual requirements as the document changes.
The second issue is internal version control. Multiple departments within an enterprise are responsible for maintaining, tracking and executing different parts of a contract. Often, separate departments are also storing contracts in different ways, leading to siloed information. This means contract updates and operations may not be shared with the entire team, including legal departments.
The third issue is manual tracking and operations necessary to manage paper contracts. Paper-based contracts must be maintained and tracked manually. In today’s labor market, where manufacturers are struggling to fill critical, skilled roles, designating contract management responsibilities and ensuring workers can meet those requirements is a significant challenge—especially as more than 2 million manufacturing roles may be unfulfilled by 2030.
A Smarter Approach To Contract Management
Smart contracts are built on I4.0 technologies, just like smart manufacturing technology on the shop floor—as opposed to paper- or PDF-based contracts. I4.0 technology integration enables smart contracts with a level of intelligence and automation that overcomes the challenges of paper and traditional tracking methods, the same way digitized manufacturing execution systems (MESs) overcome shop floor challenges
Smart contracts are stored digitally on an industry blockchain. This provides a single source of truth, eliminating the need for repeated sharing of contract updates between involved parties. Blockchain technology makes the contract immutable and unchangeable. This prevents legal gray areas from arising and ensures all parties are operating on the same contractual obligations—ultimately building trust between business partners.
In the manufacturing industry, contracts have triggers built in that change prices and fees when different production, purchasing, or other pre-set thresholds are met. If contracts are tracked manually, agreed-upon thresholds for additional charges or fees might be missed. For example, a customer contract might identify a set number of units produced. When that production level is met, the customer sends a set payment rate to the manufacturer. If contracts are manually tracked, manufacturers might not realize this threshold has been met and could miss an opportunity for additional revenue, or processing could be delayed along with the revenue stream.
Smart manufacturing necessitates connectivity between technologies and systems across the enterprise. Back-end systems automate tracking operations, immediately flagging when trigger thresholds are met. When integrated with enterprise systems, smart contracts can also automate communications with customers and partners, such as sending new pricing requests or charges. This eliminates the need for slow manual contract tracking and provides workers with more time to execute their duties that facilitate the meeting of trigger thresholds rather than spending time making sure the resulting revenue is captured.
While smart contracts provide many benefits for today’s manufacturers, this particular use of blockchain technology is in the very early stages of adoption. As a result, there are some considerations when evaluating smart contracts. First, there is the emotional trust issue of sharing legal documents with everyone. Second, there are currently legal gray areas around the enforceability of smart contracts, as the concept is so new that even legislative bodies and attorneys have yet to adopt it. Finally, significant technical expertise is required, as building a blockchain presence is a prerequisite. Keep these factors in mind and determine if and when smart contracts are the best fit for your organization.
Remove Risk For Error And Recapture Revenue With Smart Contracts
Smart contracts simplify legal operations, removing complexity and risks for human error in a critical aspect of manufacturing operations that necessitates repetitive and continuous work. Automating contract management will be essential to mitigating the impact of a growing gap in manufacturing labor fulfillment. As manufacturers continue to struggle to fill their ranks, ensuring that workers can focus on operations that drive productivity and add value to their supply chain networks of partners, customers and suppliers will be a deciding factor in business success and growth.
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